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London Films' Contraband (1940) was produced in the last months of 1939 and is considered to be the first British fiction film to deal directly with World War II. It was the second collaboration of Michael Powell and Emeric Pressburger, who had scored a hit with The Spy in Black (1939), a World War I drama starring Valerie Hobson as the love interest and famed German actor Conrad Veidt as a villainous U-boat captain. The filmmakers were tempted to create another crackling spy yarn reuniting Hobson and Veidt (but updated to the present struggle) and at the same time produce a patriotic picture touting the defenses of the Royal Navy in much the same way that the recent anthology documentary (directed in part by Powell) The Lion Has Wings (1939) had touted the RAF. The witty and exciting Contraband accomplished both goals and also provided a rare heroic role for Conrad Veidt.

The Blitz did not begin until September of 1940, but since the start of the war blackout conditions had been instituted in London in anticipation of such bombing raids. Powell and Pressburger knew that a chase staged in a blacked-out city would be a novelty and that cinematographer Fred Young could make the most of the possibilities. The film begins at sea, however, as Captain Andersen (Conrad Veidt), skipper of a Danish merchant ship, tries to outrun a British Contraband Control ship. Andersen has nothing to hide; he is bound for Rotterdam, a neutral port, and has already been delayed by moving in a zigzag pattern to avoid a German U-boat attack. The British fire a shot over his bow, and the Captain becomes cooperative when boarded by the efficient British inspectors. At the prospect of being held at the port overnight, the British give Andersen two passes allowing he and his first mate to leave the ship, but the passes are stolen by two passengers, Mrs. Sorensen (Valerie Hobson) and Mr. Pidgeon (Esmond Knight). The two disappear into the darkened London during blackout, and Andersen follows, encountering assorted spies, kidnappers, fifth columnists, and assorted colorful Londoners gamely going about their nightlife activities under adverse wartime conditions.

In his book A Life in Movies: An Autobiography (Faber & Faber, 2001), director Powell notes that "Emeric [Pressburger] wrote and was credited with the original story. We wrote the shooting script together, as we had on The Spy in Black, laughing and fighting, biting and scratching, with frequent consultations with Valerie and Connie." The film was shot at Denham Studios and on some locations around London. Crates holding film equipment sent to location were already stamped with LONDON FILMS, but, as Powell later admitted, "...I had a stencil made - CONTRABAND in big letters - and we used it extensively on all the boxes, cases and mysterious pieces of equipment that a big film unit carries about with it. This particular gag delighted the real Contraband Controllers at Ramsgate, and they insisted on stenciling our crates with their own provocative stencils, like EXPLOSIVES, EXAMINED, CONDEMNED."

The production schedule called for six weeks of shooting, and all went smoothly except for the first day in the studio. Powell decided to shoot one hectic sequence with many people scurrying about Contraband Control in one long take. Producer John Corfield observed hours of rehearsals but no filming. He was beside himself as the day wore on but none of the seven scene numbers scheduled for the day had been shot. Finally, as Powell later wrote, "At twenty past five, we started shooting and got it in the third take." Seven scenes and three minutes and twenty-two seconds of finished film were in the can and the producer was able to relax. The picture ultimately came in on schedule and under budget. In his book, Powell had high praise for all on his crew, but reserved particular notice for art director Alfred Junge. "As the headquarters of the spy circus," he wrote, "Emeric had asked for a modern office building with a lot of action around the elevator. Freddie [Young] and I were perfectly prepared to trick this with moving shadows, etc., but Alfred pooh-poohed this and gave us a full working elevator, from basement to ground floor, and the unit never tired of using it. He had a large number of sets to build and he was always on time and always ready."

Contraband opened May 11, 1940 at the huge Odeon Leicester Square, where it played for four weeks to packed houses; it was equally successful outside London. Michael Powell would later call the film "pure corn" but he also saw it as statement of national pride. He wrote that "it explained how the Contraband Control was being operated against neutrals, and why the Royal Navy had set up the control at Ramsgate, on the east coast of Kent...I thrilled to my Kentish toes at the prospect of showing how my country, with her long and vulnerable seacoast and her defenseless harbours, was already taking the war against Hitler into what he had the cheek to call 'the German ocean.' [Pressburger and I] saw a chance to prove once more that films can be a weapon of war."

Powell may have sold Contraband a bit short in the non-propaganda department. Once Veidt and Hobson are navigating the backstreets of London, looking for trouble and finding plenty of it, the film is a fast-paced delight. Veidt obviously relishes his role as the heroic and unlikely spy smasher; when he engages in a lengthy crawl of West End nightclubs in an effort to recognize the sounds surrounding the spy ring's hideout, he and an unlikely band of Danish restaurant employees witness a dizzying array of exotic floor acts. Veidt and Hobson also make for an appealingly quirky romantic couple; they are at odds onboard the ship as Mrs. Sorensen refuses to wear a life jacket to dinner and the Captain threatens to put her in irons, while later in the film the couple find themselves both in irons, at the mercy of spies, and amusingly sensual while writhing to free themselves. Powell has a bit of fun with verbal and visual nods to German expressionist films of the past; a key spy character is named "Lang," and when Captain Andersen is initially subdued, he blacks out and sees grotesque distortions of his captors, like something straight out of Veidt's own The Cabinet of Dr. Caligari (1920). Powell also noted, "...we made the conditions of London, blacked out but still getting on with its night life and private life, so interesting and so fascinating that they called the film Blackout when it was released in America, and I wish we had too. With its double meaning it's a much better title for the story."